Bos. Prop. Exch. Transfer Co. v. Iantosca

• Decision Date: 12 June 2013
• Docket Number: No. 11–2475.,11–2475.
• Citation: 720 F.3d 1
• Court: U.S. Court of Appeals — First Circuit
• Parties: BOSTON PROPERTY EXCHANGE TRANSFER COMPANY, f/k/a Benistar Property Exchange Trust Company, Inc., Plaintiff, Appellant, v. Joseph IANTOSCA, individually and as a Trustee of Faxon Heights Apartments Realty Trust and Fern Realty Trust; Belridge Corporation; Gail A. Cahaly; Jeffrey M. Johnston; Bellemore Associates, LLC; Massachusetts Lumber Company, Inc.; Zelle Mcdonough & Cohen LLP; Anthony R. Zelle, P.C.; and Nystrom, Beckman & Paris, LLP, Defendants, Appellees.

720 F.3d 1

BOSTON PROPERTY EXCHANGE TRANSFER COMPANY, f/k/a Benistar Property Exchange Trust Company, Inc., Plaintiff, Appellant,

v.Joseph IANTOSCA, individually and as a Trustee of Faxon Heights Apartments Realty Trust and Fern Realty Trust; Belridge Corporation; Gail A. Cahaly; Jeffrey M. Johnston; Bellemore Associates, LLC; Massachusetts Lumber Company, Inc.; Zelle Mcdonough & Cohen LLP; Anthony R. Zelle, P.C.; and Nystrom, Beckman & Paris, LLP, Defendants, Appellees.

No. 11–2475.

United States Court of Appeals, First Circuit.

June 12, 2013.

Joseph M. Pastore III with whom Smith, Gambrell & Russell, LLP, Sean T. Carnathan and O'Connor, Carnathan, & Mack LLC were on brief for appellant.

Anthony R. Zelle with whom Thomas W. Evans and Zelle McDonough & Cohen, LLP were on brief for appellees Joseph Iantosca, individually and as Trustee of Faxon Heights Apartments Realty Trust and Fern Realty Trust, Belridge Corporation, Gail A. Cahaly, Jeffrey M. Johnston, Bellemore Associates, LLC, and Massachusetts Lumber Company, Inc.

Timothy O. Egan with whom George A. Berman, Timothy M. Pomarole and Peabody & Arnold LLP were on brief for appellees Zelle McDonough & Cohen LLP, Anthony R. Zelle, P.C., and Nystrom Beckman & Paris LLP.

Before LYNCH, Chief Judge, SOUTER,^* Associate Justice, and SELYA, Circuit Judge.

SOUTER, Associate Justice.

As plaintiffs in a prior suit, several of the defendant-appellees here (the defendants) obtained a state court judgment for $19.2 million against the plaintiff-appellant here, Boston Property Exchange Transfer Company (BPE), formerly Benistar Property Exchange Trust Company. In order to satisfy that judgment, the successful, present defendants obtained an order from the state court assigning to them BPE's related arbitration claims against PaineWebber. In this federal action, BPE claims damages from the defendant assignees and their lawyers for mishandling the PaineWebber arbitration. The district court dismissed all of BPE's claims, either on a motion to dismiss or on summary judgment. We affirm.

I.

This is the latest of over a decade of state and federal cases arising out of the financial misconduct of BPE and its owner Daniel Carpenter.¹ In what the parties refer to as the Cahaly litigation, the following evidence led to findings that BPE, Carpenter, and other defendants were liable for various forms of financial misconduct. See generally Cahaly v. Benistar Prop. Exch. Trust Co., 68 Mass.App.Ct. 668, 864 N.E.2d 548, 552–53, 559–60 (2007); Cahaly v. Benistar Prop. Exch. Trust Co., 451 Mass. 343, 885 N.E.2d 800, 807–09,cert. denied,555 U.S. 1047, 129 S.Ct. 637, 172 L.Ed.2d 612 (2008). BPE was a financial intermediary for “like-kind” property exchanges under section 1031 of the federal tax code, which allows a property owner to avoid recognizing capital gains from a sale by using the proceeds to purchase a similar or “like-kind” property within 180 days. The seller must lodge the proceeds from the sale with a qualified intermediary (or one of several other regulatory safe harbors) until the funds are used to buy the replacement property. See26 C.F.R. § 1.1031(k)–1(g).

The Cahaly plaintiffs, who are among the defendants in this case, were six individuals or companies that used BPE when engaging in like-kind exchanges. ² BPE held their funds under agreements providing that the monies would be available on demand, prior to which they would be held in escrow accounts, either a “money market” account earning three percent interest or an “investment” account earning six percent.

In 1998, Carpenter opened trading accounts for such funds at Merrill Lynch, superseded in 2000 by new accounts at PaineWebber. Contrary to the escrow agreements, Carpenter engaged in aggressive and high-volume trading of options on technology stocks, rendered the more risky by margin funding with money borrowed from the brokerage houses. Although the trading was successful for a time, Carpenter began to lose money quickly when technology stocks fell sharply in 2000, the consequences being that BPE was unable to return the exchangors' funds as required, and ultimately lost about $8.6 million of their money.

BPE was found liable for (inter alia) conversion, breach of contract, breach of fiduciary duty, intentional misrepresentation, and violation of the Massachusetts consumer protection statute, Mass. Gen. Laws ch. 93A.³ These judgments were upheld on appeal by the Massachusetts Appeals Court and the Supreme Judicial Court of Massachusetts, Cahaly, 864 N.E.2d at 559–60;Cahaly, 885 N.E.2d at 822, and the Cahaly plaintiffs obtained a final judgment against BPE of some $19.2 million, including punitive damages, interest, attorneys' fees, and costs.

At the time of that judgment, BPE was about to begin arbitration of claims against PaineWebber, which it charged with responsibility for its debacle, as described further below. The Cahaly plaintiffs filed a motion with the Superior Court to compel assignment of BPE's legal claims to them to help satisfy their judgment against BPE, a move BPE strenuously opposed. Then–Superior Court Judge Botsford (who presided over the Cahaly trials) granted the motion in the following assignment order:

After hearing, and pursuant to G.L. c. 223, § 86A, and c. 214, § 3(6), it is Ordered that Benistar Property Exchange Trust Company, Inc.'s legal claims against UBS PaineWebber, Inc. (PaineWebber) be assigned for prosecution to the plaintiffs in this action. Any action that the plaintiffs, as assignees, may take with respect to the pending NASD proceedings is a matter for the arbitrators to decide, not this court. Any damages that may be awarded to Benistar Property against PaineWebber are to be held in escrow by the plaintiffs (through their counsel) pending further order of this Court.

Thereupon, the Cahaly plaintiffs and their lawyers (who are also defendants here) took control of the arbitration against PaineWebber. They promptly replaced BPE's statement of claim with an amended claim based on a completely new theory of liability. BPE says here that in doing this, the defendants “hijacked” the arbitration claims in a way that violated their legal duties as assignees and attorneys.

Each theory, of course, starts with PaineWebber's relationship with BPE through the brokerage accounts already mentioned, which extended from October 2000 through January 2001. As technology stocks declined in this period, BPE's losses rose to $4 million in November and $5.5 million by December 18. PaineWebber eventually decided to cut its losses from the margin transactions by forcing BPE to close its accounts and liquidate its trading positions in December 2000 and early January 2001. The crux of BPE's original arbitration claim was that PaineWebber caused BPE's own losses by forcing it to stop trading: if PaineWebber had allowed BPE to continue trading, BPE would allegedly have benefitted from a market rally in late December 2000 and January 2001 that could have erased the losses. BPE argued that PaineWebber bore responsibility not just for losing the $8.6 million, but for the Cahaly plaintiffs' entire judgment against BPE, which it then estimated at about $20.5 million. BPE sought indemnification for the Cahaly judgment, contribution for costs and attorneys' fees related to the Cahaly litigation, and compensation for other funds that it said PaineWebber withheld wrongfully from BPE. In total, BPE requested compensatory damages of $29.5 million, along with punitive damages of $58.9 million, which would treble the award sought to $88.4 million.

From the start, BPE and the state court judge knew that the Cahaly plaintiffs derided this position. One basis of their argument for assignment was that BPE's proposed theory of recovery was “meritless” and that the arbitration panel would “certainly never find PaineWebber liable for stopping Carpenter from continuing to illegally trade the plaintiffs' depository funds.” Once the assignment was ordered, the Cahaly plaintiffs substituted an amended statement of claim based on the theory that PaineWebber never should have allowed Carpenter and BPE to speculate in technology stock options with what it knew or should have known were escrowed property exchange funds. The Cahaly plaintiffs also charged that PaineWebber committed professional malpractice in brokering unsuitable speculative trades for BPE, and they contended that the broker's failure to discern the nature of BPE's business and stop the trading earlier constituted negligence and breach of fiduciary duties, among other claims. The amended claim was stated at $8.6 million in compensatory damages plus attorneys' fees, costs, and an unspecified punitive amount.

The arbitration panel ruled for BPE on the basis of the amended theory, with an award of $8.7 million in compensatory damages along with interest and attorneys' fees, for a total of $12.7 million, but with no punitive damages. The panel gave no explanation for its decision. In accordance with the assignment order, the award went to the Cahaly plaintiffs toward satisfaction of their judgment against BPE, but because the amount was less than the judgment, BPE received nothing.

II.

On December 12, 2008, BPE filed this complaint against the Cahaly plaintiffs and their lawyers,⁴ the Iantosca defendants and the attorney defendants, in federal district court, citing diversity jurisdiction. As amended, the complaint claimed negligence, breach of the attorney-client duty of care, and breach of fiduciary duty against the attorney defendants (Counts I–III); negligence, breach of fiduciary duty, and breach of contract against the Iantosca defendants (Counts IV–VI); and violation of Mass. Gen. Laws ch. 93A and the Connecticut Unfair Trade Practices Act (CUTPA) against all defendants (Counts VII and VIII).

Under each theory, the dereliction alleged was the same: that the defendants committed these violations by jettisoning BPE's claim in the PaineWebber...